COULD THE UK REPLICATE GERMAN “MITTELSTAND” SUCCESS?

JULIA CONSTABLE

NOVEMBER 2017

Germany has fostered an industry-focused environment by investing in the growth of small to medium sized enterprises (SMEs). As the third largest exporter in the world, Germany has an enviable trade-surplus which has enabled the German economy to recover faster from the global recession than any other world power. Ultimately, this rigorous investment has allowed the country to maintain the strength of their manufacturing industry which continues to drive long-term economic growth. In contrast, the service sector dominates the UK market, accounting for approximately 80% of economic output. Although the UK’s persistent trade deficit has been counterbalanced in previous years by the income generated from foreign investments and banking services, is it time for us to emulate the German Mittelstand model?

First of all…what exactly does ‘Mittelstand’ mean?

The German Mittelstand is a term that refers to the large mixture of small to medium sized businesses which have been the driving force behind Germany’s success as an economic powerhouse since the late 1800s. According to the Federal Ministry for Economic Affairs and Energy, more than 99% of companies operating in Germany are family-minded businesses belonging to the so-called Mittelstand, employing over 80% of the German workforce. Although small to medium enterprises are typically businesses with less than 500 employees, globally operating firms are also often referred to as part of the Mittelstand if they are still family-owned or are run with the same collective long-term focus, determined to deliver growth and sustainability for employees and employers alike.

For example, as predominantly family owned businesses, well-known global giants such as Aldi, the discount supermarket chain, or the worldwide engineering firm Bosch, are still considered as members of the Mittelstand. Ultimately, German SMEs are the small but mighty pillars supporting Germany’s export-driven economy, making Germany the richest country in Europe.

How was the Mittelstand established?

The foundations of the successful manufacturing-orientated Mittelstand were developed during the German Industrial Revolution of the 1850s. Although Great Britain had initially pioneered the innovations in heavy industry leading to global trade success far earlier, the Germans were able to gain a greater competitive advantage in the long-term through the establishment of favourable labour and employment laws which favoured employees and garnered the loyalty and productivity of the skilled labour force. Conversely, the British focused on the development of tertiary sector services, unable to match the manufacturing rigour of competitors such as Germany and the United States.

Furthermore, as a result of the loans afforded to Germany by the American Marshall Plan after the devastation of World War II, the German Chancellor Conrad Adenauer and then Finance Minister Ludwig Erhard were able to establish the social market economy: a new economic system which mixed the uncontrolled competition of free market capitalism with the safety net of government intervention. The combination of the capitalist principles of free foreign trade and exchange of goods with the strict government regulation of directives such as universal healthcare and pension insurance has fostered an environment which values small to medium family-minded businesses with a collectivist outlook.

Moreover, fiscal factors have had a large impact on the success of the Mittelstand. The government-owned KfW Development Bank founded in 1948 has played a crucial role in funding and supporting SMEs, by providing short and long-term loans with relatively static borrowing costs, whilst Germany’s entry into the Eurozone in 2002 devalued the currency, subsequently making exports cheaper for overseas buyers, increasing demand for products produced by German manufacturers.

Can the UK replicate the Mittelstand model?

Ultimately, the success of German SMEs has been a result of decades of investment and planning. If the UK were to attempt to replicate the success of the Mittelstand, there would be several barriers which would need to be overcome. Firstly, Germany has the highest youth employment rate in Europe due to its strong focus on training the next generation of skilled labourers; the dual education system emphasises the importance of practical work experience from a young age by combining apprenticeships with vocational school courses to ensure that the Mittelstand has a sustainable pool of skilled workers to maintain growth. In contrast, the British education system is still academically focused, encouraging young people to work towards university degrees rather than promoting the value of vocational courses. Moreover, the historical foundation of the Mittelstand stems from the necessity to create an economic miracle from the rubble of post-war Germany in the late 1940s. This desperate need to collectively rebuild the economic foundations of a country decimated by war, combined with the necessity to reform and reshape the collective consciousness of a nation resulted in the development of a deep-rooted, specialist mind-set which differs from that of the British.

These differences are illustrated by Hofstede’s cultural dimensions; although his study regarding the cultural values of IBM employees worldwide during the 1960s and 1970s is now rather dated, his attempt to illustrate the effect of culture on the values held by its population still holds value. For example, when comparing the cultural values of Germany and the United Kingdom, Germans prioritise long-term, risk averse planning with a more collectivist mindset – something that had been fostered due to the stringent regulation of the social market economy. Whereas, their British counterparts are far more individualistic, risk-taking and short-term orientated, all factors which directly contradict the concepts of Mittelstand firms.

Culturally, this collectivist instinct means that Germans are more inclined to foster workers from a young age in a family-minded organisation in order to create loyal workers who are willing to dedicate themselves to a business for a lifetime. The main goal is to instil workers with the skills, passion and drive to painstakingly grow a business with a long-term view and a low risk strategy.

In contrast, the British favour high-risk high-reward strategies with a “stiff upper lip” attitude towards uncertainty and potential danger. The prevailing capitalist principles in Britain have promoted an individualistic attitude which is ingrained in the business culture; this tendency to “muddle through” combined with a desire to remain flexible and innovative often hinders long term planning and investment which can be seen as a hindrance when adapting to change. Furthermore, according to the Forum for Private Business, nearly two thirds of UK based entrepreneurs plan to sell their SMEs in order to fund their retirement, suggesting that most family-run businesses have no intention of retaining the company for further generations.

Although UK business owners should look to Germany as a successful competitor from whom we can learn, the extraordinary historical foundations of the economy are irreplicable. The development of the social market economy and the triumph of the post-war Wirtschaftswunder (economic miracle) helped to develop a stronger sense of society for the Germans who are invested in securing their long-term economic stability. The Mittelstand is truly proof that necessity is the mother of invention.

BIG BUSINESS BE TRUSTED FOLLOWING THE VW SCANDAL? – FOOD FOR THOUGH

Trusting the words and deeds of big business has taken a hammer blow to public confidence in the wake of the Volkswagen scandal. But all large multinationals have skeletons in their cupboards, whether it be fiddling pollution emissions; low employee pay; polluting and contaminating pristine environments; endangering wildlife, etc. As exposed with VW, hoodwinking the public has been widespread – and (apparently) without sanction, which would suggest that governmental authorities created to oversee standards and pollution control have either not been doing their job and/or have been complicit in allowing such grievous breeches to go undetected.

The German carmaker VW is a special case, because this company is part-owned by Lower Saxony, so in this respect politicians (in effect) are the company owners, and in this situation the German body politic is (uncomfortably) riding two horses, legislator and shareholder. That type of noxious mixture creates a lot of suffocating black smoke when it comes to enforcement!

Some multinationals prefer to be “voluntarily” audited by third parties to “prove” the value of their products in terms of purity; quality; fair trade; sustainability, etc. Others prefer to obtain accreditation through the ISO Marque (International Organization for Standardisation), a system of combining national standards from across the world into a unified World Recognised Standard. As it is clear some multinationals are not behaving ethically, it is probably about time all products were forced to comply with a recognised International Standard, which ensures the highest standards are being consistently and objectively met. What is needed is a strong independent International Standards Authority which would be able to (heavily) fine transgressors and would require manufacturers to police such a system. This would ensure compliance and improve the quality of all manufactured goods. Clearly, without tougher policing and harsher penalties big brands can continue to flout rules and standards in what will become a race to the bottom.